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[music] >>Hello I'm Greg Bonnell and welcome to MoneyTalk Live, brought to you by TD Direct Investing.
Every day will be joined by guests from across TD, many of whom you will only see here.
We we'll take you through with moving the markets and answer your questions about investing.
Coming up on today show, joined by Michael Craig, Head of Asset Allocation at TD Asset Management to discuss the state of the markets.
MoneyTalk's Anthony Okolie have a look at a new TD Economics report on fundamentals in the office real estate sector and in today's WebBroker education segment, with earnings season in full swing, Nugwa Haruna will walk us through where you can find the company's financial statements on the platform. Here's how you get in touch with us.
Let's get you a look at the markets.
First day of May. A pretty modest 39 points.
On the TSX Composite Inmoney moving, the Hudbay stock at $6.95 a share. Up a little more than 2%.
a little weaknessdex. A little more than 1/5 of a percent. I noticed some a little weakness in some of the energy names.
Let's take a look at Imperial. South of the border, the S&P 500, that broader read of the American market, up a very modest five points. It seems like a bit of a calm day out there. We'll get to some of the things happening below the surface in a moment's time.
Up more of 1/10 of a percent. The tech heavy NASDAQ last week was a big week for the MegaCap tech names. I think Apple might be on deck this week.
Yet the NASDAQ down a little shy the 30%. Let's take a look at Amazon. See how it's faring.
A little weakness in this name down three bucks a share, about 102 bucks and change about a 3% downside an aftermarket update.
We are starting the month with plenty of news from investors to chew on. Regularly forcing the sale of another regional Bank in the US. One of the majors.
Joining us now for his view on where the markets go from here, Michael Craig, Head of Asset Allocation at TD Asset Management. Great to have you back with us.
>> Great to be here Greg.
>> Great fortune to have you back and were having these events south of the border. Another US regional Bank.
Another seizure by regulators.
How to read this? The marketers are pretty red calm right now.
>> It's May Day in Europe.
I think with the First Republic deal, it takes you know, a real source of risk out of the market. J.P.
Morgan bought them for about 10 billion from the FDIC's, bonds and equities at zero. Their bonds are trading at about 1500 about two years ago would've sold off precipitously and are now basically zero recovery.
But it does take source distrust out of the market. You know, this probably will be the last casualty of this hiking cycle. But, the story now is, for all intents and purposes, over.
>> Jamie Dimon done his comments today, saying this part of the crisis is over. Not ruling out perhaps another smaller regional Bank getting in the same kind of trouble.
But not reading through problems of the wider banking system. When we think about that?
>> This was not looked at as a systematic Bank. It was large.
A very niche high net worth target set.
Big push in the wealth. You know, J.P. Morgan, they have some guarantee financing. They have some reasonably attractive terms.
But it is a fairly small acquisition for them going forward.
So, we did some work on this.
When you do look at hiking cycles of the Fed, you always tend to have breakdowns and it's really the weaker when it was put under a lot of stress.
And this, it will be more I think, as we go into the latter half of this year and we stay on restrictive levels and interest rates.
>> Let's talk about interest rates.
Of course at the heart of this, affect on some of these smaller institutions in terms of how they sort of, structured taking deposits, where they were putting them… It did not work out with the rates.
Getting so aggressively higher. The Fed is on deck and the expectation is that we will get another rate hike from them.
I mean the Fed is watching this. But they don't seem that concerned.
>> Yeah. I still think their number one priority right now is getting inflation to come down.
It's proven to be sticky. It's lower than people expected but I think, they have the tools or release the belief of the tools to take care of events like this. You know, a lot of money was put at the discount window in March. You saw the Fed balance sheet momentarily expanding and then it started to contract.
So I believe they feel they have the tools to deal with these kinds of flareups.
But they are not backing down until they see inflation start to behave and there are parts of the inflation story that have come off. Goods prices have come off materially.
But wage and employment growth still remains quite strong.
He remains part of inflation pump still quite a dish. I think this will likely be the last hike. Maybe 1 More in June. But the question now, one has to ponder is how long we stay restrictive. The longer we stray we stay restrictive it's like a slow poisoning to the economy.
It really does cripple business activity. It will crimp business activity in the quarters to come.
>> Some parts in the market wagering about the Fed even though more than likely, those are the odds this week, maybe one more. Then they will be cutting.
As early as December.
To me that seems like quite quick change of pace. Dare I say even a "pivot".
>> I think that's were some confusion comes in the market.
The Fed has not done any favours by saying this is where things are in the market. Way too aggressive.
I think what the market is telling you is that this is really a collection of probabilities.
So the past doesn't make any sense on its own.
what it is is a combination of nothing.
Or we go into a recession and the cut 300. Which is historically what they would do.
So that small, you see a hike and then 150 basis points or 100 basis points. It cuts than here. Highly unlikely I think when you see 100 basis points.
The two I would be looking for is nothing or three or 400 in a situation where we have a hard landing, if you will.
I think that's what you should draw out of that.
The probability of really a binary outcome of the world. And I've talked about that last month about the chance of a real goal contraction this year. Again, to say what's going to happen is kind of a game. That's one probability and the investors need to be very aware of into the end of the year.
>> With all these major forces at play, the thick of earnings season, now we've had some pretty heavy weight reports out of the states. What are we seeing that those earnings?
>> I think generally speaking better-than-expected.
Some weakness in the economy sectors.
Tech came in fairly good if you will, that is in expectations.
You see a pretty big rally this year.
I would not get too excited about it.
Amazon did more in their shares are up quite a bit.
We are seeing a slowing. I don't expect to see, you know, earnings and start to inflect anytime soon.
We will continue to see earnings struggle to beat last year into the remainder of the year.
>> From an asset allocation perspective, given the fact that this is what we are seeing from earnings, given the fact that the Fed is on deck this week and the stresses in the US regional banks, what should investors be thinking in terms of putting money to work on the markets and allocating cash?
>> For us right now the word do sure would be patients.
We are running a fairly defensive positioning.
We still hold equities. We have hydrated to kind of, larger higher quality parts of the market.
Survivors, if you will, companies with business models who tend to actually thrive through this as their weaker counterparts succumb to stress of the slowing economy. We do have, we have in the past and continue to favour fixed income. It's one of those where we can kind of have a defensive set up. Earning 5% of the income side.
Dividend yield, dividend yields, outside of the US are pretty attractive around the world.
And it's one of those periods where you just want to minimize mistakes right now. I think you know, the third mark of the year, we have had this pretty aggressive rally in tech which is a real weakness last year. Much I believe is been positioning a lot of investors getting caught shorter underway or whatever.
There is been a bit of a catch up.
That is always the analogy from bear markets.
You try to do something and be clever and you get hurt.
It's really about being patient and consistent right now waiting for things to start presenting opportunities again.
I don't think it's a great entry point right now for risk.
>> Any signposts to look for while we are patient?
Maybe our patients will start to pay off for us?
>> Two things I think that are still steady for us is one would be to see a value rather valuations come high in bond yields. I still think valuations in the US market are too high. The second is really starting to see inflation crack and that will require the housing aspect of inflation, rents etc., coming off as well as services.
So core services.
Core services, excluding housing in the US. You want to see those two sectors because until you see that, you're going to continue to have a strict policy. Like I said earlier, more things will break. Those are the two things I want to see improved material into the end of the year before we start getting a bit more excited about the backdrop.
>> Always great insights with Michael Craig.
We will get your questions about asset allocation for Michael in just a moment's time. A reminder of course that you can get in touch this by emailing moneytalklive@td.com or Philip that viewer response box under the video player on WebBroker.
Now let's get you updated and some of the top stories in the world of business and take a look at how the markets are trading.
Norwegian Cruise lines is raising its profit forecast after handing in stronger-than-expected first-quarter results.
Company is been raising ticket prices and is optimistic for travel and demand an onboard spending by wealthy crews and customers will continue to boost revenues.
Norwegian has said it expects fuel and food costs to ease later this year. You see right now the stock up 8 1/2%.
Enbridge, acquiring and natural gas storage facility in British Columbia for $400 million.
A deal with fortis BC holdings which has 77,000,000,000 ft.9 of capacity. Enbridge says the facility is with three natural gas potential lines.
Cargojet reporting lower profit for its most recent quarter.
Carbo said the company says volumes are spending toward services and away from goods. A trend they expect will sit will stabilize later this year.
They say it focuses on controlling costs while riding the current economic environment. Stock up about 5%. A quick check in on Bay Street and Wall Street.
Starting here and over the TSX Composite Index.
49 point game. Pretty modest, about 1/4%. South of the border, the S&P 500 right now up a very modest eight points. About 1/5 of a percent.
We are back now with Michael Craig taking your questions about asset allocations. Play coming and let's get to them.
(Greg reads the question) let's talk about Alice asset allocation.
>> You know, when you say long term, I'm assuming five years or more. You know, right now, outside of the US, Europe Canada, not too expensive.
Fixed income is offering highest income yields that you've seen in 15 years. So those will be places I be looking in. I think, again, if you're saying long term, it might be a little bit hairy to the next 6 to 9 months. But again, as long as you're in that quality side of the market you'll be fine.
Those would be the areas I be looking at right now.
Ultimately it's really key that you understand what you're trying to achieve with your long-term investments, depending on if you're trying to make a lot more returns.
Always a good place to have some advice for an advisor.
>> Talking about fixed income part of the portfolio.
Obviously last year was a very tough year for both fixed income and equity given how aggressive the central banks were.
Saying with yields have not been this attractive for this long time for fixed income.
I guess the possibility, when you do see the central banks firmly decide to get out of restrictive policy and do a bit of cutting, maybe even a little gaming on the headline of the number of the bond?
>> There are three things in fixed income right now in that are interesting. One is, if nothing happens, yields are at 5%. My senses as inflation starts to moderate that yield will actually be excessive in excessive inflation so that is very appealing to investors. Second, because last year was so tough much of the market trades well believe on par.
The bonds will, as they come to maturity, you get your $100. So from an after-tax perspective, fixed income is again trying to bring as much of that return over time will be capital not income. So better tax advantage.
The third, I mentioned earlier, there is a chance we go into a severe recession this year.
I wouldn't put it as a base case but it is one in six or one and seven. If that materializes, the complexity of fixed income will kick in and I would expect to see material capital gains from government bonds.
So, again, that's a very problem rather probable. It's not a forecast but it will be the third reason why fixed income is an asset class are now.
>> Let's get to another question from the audience.
This one about government bonds.
Are there differences to be considering here?
>> There are a few to be mindful of.
One is the currency of course. Depending on whether it's hedged or not. If it is not hedged, much of the return is going to be coming from the differential between the Canadian and US dollar. So you have to be thoughtful about whether it's, you know you have US dollars and you're looking to keep them in the US, that's fine.
But if you are impacted by the currency differential, that's quite important. In terms of outright yield, the US actually trades at a material discount to Canada right now.
I would say that discount is a higher end of its long-term, over time, US trades above and through Canada.
Right now, it's at the top decile in terms of being cheaper in Canada. So many across the curve, you were looking at anywhere from 60 to 80 basis points additional yield from US treasuries.
The last thing I think you need to be mindful of is that we do have this budget ceiling headache coming down the pipe and that could lead to some nuclear volatility in the US markets. So one thing to be mindful of.
>> Is that short-term volatility? When we think of the debt ceiling, there's a lot of political wrangling about it. The US government, I think, when people are trying to be optimistic or even realistic saying one of the chances they would actually default on that?
Although if you get into political games who knows who makes an error?
>> Yeah.
First of all the market is showing stress of this already. Treasury bills that are maturing before there date when you think they're going to run out of money, a huge premium to treasure bills that are maturing after. As well as fall swaps on the US government data are at an all-time high right now. So there is a lot of angst in the market.
You, in theory, could have a default through operational issues. Through the Constitution, they are actually not allowed to default but because there is so much operational risk in trying to say "okay, were not going to pay pensions and healthcare.
… The risk of an operational error should not be dismissed." The issue with this, eventually, they will likely come to some type of resolution. The question is what kind of damage do they do to confidence by the time you get there.
And neither party right now is incentivized to really make a deal because they are basically, if you're a Democrat, you get to a budget issue, you're going to blame Republicans. And in Republicans, they will blame Democrats.
So there is no incentive right now for either party to compromise.
I think, will this be a material source of heartburn over the next couple months.
>> Heartburn.
I like how you put that. I suffer from that sometimes.
Next question: (Greg reads the question) >> That's an interesting question. In terms of again, it goes to the kind of scenario you're playing for.
But, just to be very simply, in terms of total return, the risk is, the risk is part of the curve which will be the biggest price impact if there is a rally, it will be the longer end.
So if you are bullish in fixed income, you can take that type of risk, you might want to look at the longer end of the curve as it will have the biggest the biggest price gain. But to be clear, the long and has actually suffered about a 50% decline since 2001.
So this is not for the faint of heart.
If you're looking for the biggest bang for your buck if you will, it will be the longer term governments.
>> Some people want to take a look at fixed income, perhaps they don't have the kind of money for the market to get in to government issues.
Obviously there's other alternatives.
What people need to think about ETF's are mutual funds?
Other instruments thought of as fixed income but not purely just buying a government bond.
>> If you buy the whole market you have other sources of bonds. Corporate if you will. Right now, trading ads, I would say fairly tight spreads.
Relative to the backdrop.
In a soft landing scenario, those would be faring very well. In a hard landing scenario, that will be a bit of a headwind to your tailwind.
Floating right now would be another part of… That will be a bit more challenge in an economic slowdown because they tend to be more leverage companies. So fixed income in itself is exercised asset allocation.
You can a fixed income that is very equity like all the way to pure government.
This is where you do your homework and understand what you're buying to make sure you are aligning what you're trying to achieve with the instrument you're using.
>> Is always at home make sure you do your own research before making any investment decisions. We will get back to your questions with Michael Craig on asset allocations in just a moment's time.
A reminder that you can get in touch with us any time by emailing moneytalklive@td.com.
Now let's get to our educational segment of the day we are in the thick of earnings season. If you like to see a company performed in the way this quarter, WebBroker has tools which can help.
Nugwa Haruna, Senior Client Education Instructor with TD Direct Investing as more.
>> By law companies are required to produce the financial statements. And they will produce the statements quarterly and at the end of their fiscal year. So there are three financial statements that investors can find in WebBroker.
That would be the balance sheet, the income statement as well as the cash flow statement. Let's show investors how they can find these financial statements within WebBroker.
Click on research, under "investments" they can click on "stocks". Any company they are interested and once here you can click on "fundamentals".
And on "financial statements". Now for investors looking to find the quarterly financial statements, they can do that by clicking on the tab that says interim. But if you're looking for annual financial eyes statements annualized financial statements you can click on "annualized" starting off of the income statement.
This is also known as the profit and loss statements.
It gives investors an idea what the financial performance of the company has been over a particular period.
Then there is the balance sheet statement. Essentially the net worth statement of the company. It gives investments an idea of the company's assets.
Which is what the company owns. The company's liabilities which is what the company owes as well as shareholder equities so essentially, how much investors have invested into the company. Finally, there is the cash flow statements. The cash flow statements gives investors an idea of just how well the company manages its cash position. Debt obligations as well as how well it's able to fund its debt operations. Investors might ask "how is this relevant to me as an investor and how can I utilize this information?" That is where the idea of ratio analysis comes in.
It takes information from these financial statements and compares that on an industry basis or company to company basis.
So investors looking to do a ratio analysis can do that by clicking on the industry comparison tab. We will focus on one ratio today. Just going to scroll down.
We will look at the current ratio.
The current ratio essentially is a liquidity measure.
It gives investors an idea of how well a company is able to meet its short-term liabilities which would be any debts due within a year.
Using it short-term assets so anything it owns that it could turn into cash within a year.
Now, an investor would compare what the current ratio of the company is compared to the industry.
If the current ratio is on par or slightly higher than the industry average, that may be a good thing because it shows the company may be able to meet its debt obligations. On the other hand, if an investor finds that the current ratio is much lower than the industry average, it could be an indicator that the company may be at a higher risk of defaulting or maybe experiencing financial distress. So essentially when an investor is looking at things like the financial statements are ratio analysis, they can do this in WebBroker and eventually look at how they can tie this information back to their investing strategy whatever that may be.
>> Our thanks to Nugwa Haruna, Senior Client Education Instructor TD Direct Investing.
Make sure to check out the learning centre on WebBroker for more educational videos, live interactive master classes and upcoming webinars.
Now before we get back to your questions about asset allocation to Michael Craig, a reminder of how you can get in touch with us.
Do you have a question about investing, or what is driving the markets? Our guests are eager to answer your questions so send them to us here at MoneyTalk Live. You can send your questions two ways: you can send us an email any time at moneytalklive@td.com or you can use the question box at the bottom screen right here on WebBroker just type your question and hit "send". We will see if one of our guests can get you the answer right here at MoneyTalk Live!
>> We are back with Michael Craig Head of Asset Allocation at TD Asset Management, taking your questions about asset allocations.
Let's get to this one.
(Greg reads the question).
>> I will answer them three ways. First, there are 6000 regional banks in the US. It's a very fragmented banking model. These are not the J.P. Morgan's or Bank of America's. These are small regional local banks.
Very simple business models. They take deposits, they lend to local businesses and that's it.
So very simple, rudimentary banking model. They, it's quite often, these disappear.
Bankruptcies all the time.
As a depositor in the US you are covered up to $250,000.
So for Canadians who may be snowbirds and have their money, from their perspective, just be mindful that you are insured up to that amount and there is always a risk dealing with very small regional banks.
As a Canadian investor, are far banks are very different.
They span multiple businesses wealth insurance, banking, etc.
Our overall funding risk is overpressure on our sector.
You can't compare the two. And our model has been much more conservative with far more balance sheet strength, if you will. So I don't really see, it's not a one-to-one stress happening. Regional Bank in the US does not necessarily lead to stress and the Canadian.
Obviously, we see globally, financial conditions tighten and it will put stress but I just don't, our banking sector is one which we have chosen and a handful of very strong institutions. Not a kind of massive, weaker ones.
Historically, that's proven to be the right model in terms of stress so it's not something I worry about it might to be honest. But it is important, you know, taking the question into context about how you're exposed to regionals and that would be something I would be mindful of.
>> One of the larger readthrough is, I've seen attributed to what's happening with US regional banks is that, I think the Fed even admitted themselves, when it comes to their rate policy, maybe as we are trying to let you know, tighten things up, cool the economy a little bit. This could actually do a bit of the work for them in terms of availability of credits of the border.
Maybe the Fed doesn't even need to be as aggressive as one it once was.
>> 100%.
It'll come out early this month.
The Fed's survey of lending officers, it has tighten materially. As credit growth slows, this will really put brakes on investment and, you know, resist the question of how much real economic damage has to occur to see inflation come off.
This is a race right now between inflation cooling and the hit to growth that you will see because of it. So.
That's the way I would think about it.
>> Okay. Here's what we've been skirting around.
Point blank: do you anticipate a hard or soft landing?
>> Yeah. I am… We are positioned for both.
Let's put it that way.
So there are certain aspects of the backdrop right now that are quite ominous.
Commercial real estate in the US has struggled. Credit conditions are tightening.
We do have this backdrop of a world that has a lot of debt.
So we are not talking about the 1980s when debt levels were very low.
So that, in the back of my mind, is one where it could be positive and like I said earlier, don't listen to me.
Global growth could drop to 1% and it would be a pretty severe recession.
So that would be… You know, on the flipside, there isn't an obvious… Massive balance right now. It's not like they can point to something and say "there has been tons of capital chasing this bad idea that is been blown up.
US residential real estate in the 2000. So it's not clear to me what part of the economy is really vulnerable in terms of multiple years of excessive investment.
So, our thought processes if we go into some type of recession this year, it's not going to be a deep and brutal credit crunch like we saw in 2008.
But I would not want to dismiss it as impossible.
Sorry to not give a precise answer but this is a business of probabilities and building portfolios that tend to do well in a handful of different circumstances and I would say, the way we are built right now is how either those circumstances happen today, I would look at portfolios and say I don't really need to change much. Because that's kind of how we are set up for that outcome.
>> The playbook for central-bank, obviously, if you had a recession or severe recession, slashing rates aggressively. That's the playbook. Can they do it again? After what they just did in 2020?
>> Again, if you have stagflation area environment, I don't think you can.
So that is the real risk.
It might… We have gotten so used to these kinds of V shaped markets. Easing and popping back up… I think many are not prepared for this kind of meandering market that just kind of goes nowhere for two years.
We are about 14 months into that market right now. But, for us, we are not really expecting this kind of V shaped more than anything, it's more of meandering. I would not be shocked if stock markets are giving or taking where we are today after 10 months time, maybe going through some volatility but not going anywhere.
As we start to ultimately, there's two types of corruptions, price one that we are all sensitive to but this idea of a time crunch and we kind of the knower for two years and you kind of rebound again.
So that's kind of how we are thinking about how the next 12 months plays out.
That more meandering estate of the world.
>> Another question now, this one in the headlines (Greg reads the question) so… I've seen arguments on both sides of this deed dollarization thing. How much attention should be paid to it?
>> I don't think a lot.
It's, you know, with the war in Ukraine, one of the steps the Americans took was to use the dollar as a weapon.
And to basically use the swift movement of payments and transactions to really lock out Russia. In other countries, obviously took notice and are realizing that, you know, they get on the wrong side of US policy, there's a risk that this happens to them. So there is an incentive to move away from it. It's a little bit, it's easier said than done.
Because if you and I want to trade, you have to sell me something I want and after provide you something that you need. And there are certain bilateral relationships are I think that makes a lot of sense.
If you take Saudi Arabian China, could you check use with oil in Chinese technology, that could actually facilitate trade outside of the dollar system.
I don't think I mean I think this is probably a likely trend. What it means no, well, in certain places, right now, most places of the world will take US dollars right?
It might be at some point in our lives where the dollar isn't as fundable as it has been in certain countries because they don't use that currency. Does that of a huge implication for finances? I don't really know.
It's not something where "oh my gosh I have to sell my assets because the dollar is going to zero" I don't think that's a Takeaway.
The takeaways that we are moving away from a sole US dollar.
Replacing pound sterling and we are probably going into a world we don't really have the sole economic superpower that is driving. Where trade is still the currency. But it will take this is a theme that will probably take longer than my career in your career. It will take many years for this to play out.
>> Let's get to another question now. Sector specifics.
When you think of REITs is their office real estate danger?
… Tuesday and Wednesday and Thursday a little challenge.
>> A few things. Not all REITs are office-based.
There's a difference between a diversified REIT and one it's focused in office. Our approach is been to spread it around.
Multiresidential is still very tight. Industrial is still very tight.
An office is quite soft right now. Vacancy rates in Toronto for example are 17 to 18%.
Calgary even higher.
That's can lead to some stress in that part of the market. In the US, it's been quite mercenary, if you will.
You saw a couple of major layers just walk away from buildings and say "here the keys".
I don't think you get, things after really materially deteriorate here. It's not the way commerce in Canada and that trade.
But I would say that scenario it will probably be soft for a while and I don't think we have, kind of, settled. I don't think companies necessarily settled on in person versus virtually. I think it's very much still in flux deepening of the business you're in.
So your empty seats on the go train, they might be there in a year, they might not.
That's something else you probably want to consider. Or we can go to more higher rate or less?
My sense is probably less. But in the near term, it's going to be a bit of a struggle in the office market.
> I got longlegs to so I need some room on the train.
Very selfish of me! We will get back to your questions with Michael Craig on asset allocation in just a moment's time.
Always do your own research before making any investment decisions and a reminder that you can get in touch with us.
Do you have a question about investing, or what is driving the markets? Our guests are eager to answer your questions so send them to us here at MoneyTalk Live. You can send your questions two ways: you can send us an email any time at moneytalklive@td.com or you can use the question box at the bottom screen right here on WebBroker just type your question and hit "send". We will see if one of our guests can get you the answer right here at MoneyTalk Live!
> Speaking about commercial real estate, of course concerns and they are escalating, a multitude of headwinds including high vacancy rates, tighter credit conditions. Anthony Okolie joins us now with the new report from TD Economics.
>> Thank you very much Greg.
TD Economics says commercial office rate fundamentals remain sluggish. It's highlighted by the fact that the vacancy rates are past the global financial crisis peak.
Actually rising to a new all-time high of nearly 13% last quarter.
TD Economics notes that office usage across 10 large US metro areas is still less than half its pre-pandemic levels.
Now, the impact is not felt evenly across markets. They note in the report that markets like Miami and Tampa Bay have been helped by the inflow of both people and businesses during the pandemic in the office vacancy is not much higher today versus the end of 2019.
However, the pandemic Simpact has been felt much worse in other areas like San Francisco and Seattle.
Where vacancies around triple and double the precoded levels respectively in those cities. Now, this is having a big impact on office rents.
Which of barely grown since the start of the pandemic.
Rising only about 1% year over the past year.
Also, type lending environment is also hurting new deal activity.
With the fourth quarter of 2022, new transaction volumes for offices at the weakest levels since the fourth quarter of 2009. TD Economics does not see a turnaround in sight for the office real estate commercial space. One of the reasons they point you, and we have been talking about this today, is remote work still persists. About 30% of the five-day workweek is still spent away from the traditional office, work office environment.
Also, there is some 60,000,000 ft.8 of new office space in the US to come online by the end of the year. Adding to an already saturated market. And with an estimated $150 billion in non-bank office debt expected to mature over the next two years, the bulk of that, actually coming to this year due, couple that with tighter lending conditions, plus the fact that many of these loans will reset much higher rates.
Boost the odds of commercial real estate, mortgage defaults will be on the rise over the coming year and TBD TD Economics does not expect to see a meaningful turnaround very soon.
Greg?
>> When it comes to some of that banking sector stress in the regionals in the states of course, there's been a commercial property angled to that.
What does the latest data tell us, the Fed about how that's transpiring?
>> The Fed has this banking funding program for some of these banks to get into trouble. They said the weekly data showing that banks use of emergency low programs remains elevated and has been trending moderately higher in recent weeks. Now, good news is the uses below the peak recorded back in March. But TD Economics points to this evidence as signs that the recent banking stress continues to linger as it has yet to meaningfully subside.
Greg?
>> Interesting stuff. Thanks Anthony.
>> My pleasure.
>> MoneyTalk Live Anthony Okolie.
A quick look at the markets. Let's check with the TSX Composite Index.
About 1/3 of a percent, fairly modest.
Noticing some of the miners getting a bit today. Let's check on IAMGOLD right now.
Did notice some weakness in the lumber including Interfor.
2118 a share, only down to 30%.
South of the border, the S&P 500, let's take a look at that broader read of the US market, 14 points, 1/3 of a percent.
You do have the Fed on deck this week on Wednesday, as Michael was telling us earlier, May day holiday in Europe.
Let's take a look at the tech heavy NASDAQ. Negative the beginning of the show pretty not much is flat now.
Uptick.
J.P. Morgan, of course in the headline today.
Right now it 142.90 a share a little bit more than 3% of a big Wall Street name.
Back now with Michael Craig had a vast I look with TD Asset Management. Take your questions about asset allocation. Lots coming in.
This one right now, do you expect companies to raise dividends?
>> So a broad question.
Some will raise of course.
They some raise every year. But I would expect the dividend growth slow in line with earnings growth being you know, negative.
We expected to be negative.
We see negative dividend earnings raise from that.
The other side would be that you now, excess cash flow, they might start thinking about debt payment as well.
Because the cost of financing is much higher than it was. So, there is more incentive now to deliver, if you will, versus because of the cost of money. So I would not be too bullish on the prospects of broad-based dividend raises over the next four months.
>> In an environment like this, it's understandable.
Before let you go, I want to talk with the broader team at the top of the show. So much in play right now.
We are in the thick of earnings season.
The first Republican Fed on deck, what should investors be thinking in the near term? Even in long-term?
>> In the near term I have one eye on what's going on with the US government.
I think that matters a lot.
… Going into, kind of Q2, H2 of the year, be mindful of looking for and continuing to slow down, imagining kind of coming off of manufacturing contraction services positive. Watch that data.
The sensitivity to economic data is incredibly high right now because people are confused. Rightly so. So have an eye on economic data to see where it continues to go lower. If it does, you can kind of get a sense that a recession is more likely than not. So that would be where our focus would be in the next 3 to 12 months.
>> If you take understandable confusion, some drama in the short term, the US government and other areas, what does that say about a discipline for an investor? It seems like a time where you really need a strategy that you believe in. And you stand by and you don't panic in the middle of everything.
>> Let's talk about ways you can use a lot of money.
You lose a lot of money when investments go bankrupt.
You're investing for a longer period of time, these absent flows, some years are better than others.
But as long as you don't have that permanent loss of capital, everything tends to do okay.
So I would be very focused on quality. Companies that will likely actually, consolidate and get stronger.
You. Like this.
Tend to see them actually build their businesses because they take out we competitors.
You want to make sure you have high quality to your portfolio. Companies that continually grow the dividend is a great metric of long-term health would be one thing I look for.
That's where I would be placing my investments right now. Versus the more kind of, fringe year stuff that will probably disappear in the next couple years because the conditions we are operating in.
>> Always great to have you here. Always insightful and looking forward to the next time.
>> My pleasure.
>> Our thanks to Michael Craig Head of Asset Allocation at TD Asset Management. As always make sure you do your own research before making investment decisions.
Tomorrow, we will welcome Cathie Wood about technology stocks.
Email your questions at moneytalklive@td.com.
That's all the time we have the show today. Thanks for watching and we will see you tomorrow!
[music]
Every day will be joined by guests from across TD, many of whom you will only see here.
We we'll take you through with moving the markets and answer your questions about investing.
Coming up on today show, joined by Michael Craig, Head of Asset Allocation at TD Asset Management to discuss the state of the markets.
MoneyTalk's Anthony Okolie have a look at a new TD Economics report on fundamentals in the office real estate sector and in today's WebBroker education segment, with earnings season in full swing, Nugwa Haruna will walk us through where you can find the company's financial statements on the platform. Here's how you get in touch with us.
Let's get you a look at the markets.
First day of May. A pretty modest 39 points.
On the TSX Composite Inmoney moving, the Hudbay stock at $6.95 a share. Up a little more than 2%.
a little weaknessdex. A little more than 1/5 of a percent. I noticed some a little weakness in some of the energy names.
Let's take a look at Imperial. South of the border, the S&P 500, that broader read of the American market, up a very modest five points. It seems like a bit of a calm day out there. We'll get to some of the things happening below the surface in a moment's time.
Up more of 1/10 of a percent. The tech heavy NASDAQ last week was a big week for the MegaCap tech names. I think Apple might be on deck this week.
Yet the NASDAQ down a little shy the 30%. Let's take a look at Amazon. See how it's faring.
A little weakness in this name down three bucks a share, about 102 bucks and change about a 3% downside an aftermarket update.
We are starting the month with plenty of news from investors to chew on. Regularly forcing the sale of another regional Bank in the US. One of the majors.
Joining us now for his view on where the markets go from here, Michael Craig, Head of Asset Allocation at TD Asset Management. Great to have you back with us.
>> Great to be here Greg.
>> Great fortune to have you back and were having these events south of the border. Another US regional Bank.
Another seizure by regulators.
How to read this? The marketers are pretty red calm right now.
>> It's May Day in Europe.
I think with the First Republic deal, it takes you know, a real source of risk out of the market. J.P.
Morgan bought them for about 10 billion from the FDIC's, bonds and equities at zero. Their bonds are trading at about 1500 about two years ago would've sold off precipitously and are now basically zero recovery.
But it does take source distrust out of the market. You know, this probably will be the last casualty of this hiking cycle. But, the story now is, for all intents and purposes, over.
>> Jamie Dimon done his comments today, saying this part of the crisis is over. Not ruling out perhaps another smaller regional Bank getting in the same kind of trouble.
But not reading through problems of the wider banking system. When we think about that?
>> This was not looked at as a systematic Bank. It was large.
A very niche high net worth target set.
Big push in the wealth. You know, J.P. Morgan, they have some guarantee financing. They have some reasonably attractive terms.
But it is a fairly small acquisition for them going forward.
So, we did some work on this.
When you do look at hiking cycles of the Fed, you always tend to have breakdowns and it's really the weaker when it was put under a lot of stress.
And this, it will be more I think, as we go into the latter half of this year and we stay on restrictive levels and interest rates.
>> Let's talk about interest rates.
Of course at the heart of this, affect on some of these smaller institutions in terms of how they sort of, structured taking deposits, where they were putting them… It did not work out with the rates.
Getting so aggressively higher. The Fed is on deck and the expectation is that we will get another rate hike from them.
I mean the Fed is watching this. But they don't seem that concerned.
>> Yeah. I still think their number one priority right now is getting inflation to come down.
It's proven to be sticky. It's lower than people expected but I think, they have the tools or release the belief of the tools to take care of events like this. You know, a lot of money was put at the discount window in March. You saw the Fed balance sheet momentarily expanding and then it started to contract.
So I believe they feel they have the tools to deal with these kinds of flareups.
But they are not backing down until they see inflation start to behave and there are parts of the inflation story that have come off. Goods prices have come off materially.
But wage and employment growth still remains quite strong.
He remains part of inflation pump still quite a dish. I think this will likely be the last hike. Maybe 1 More in June. But the question now, one has to ponder is how long we stay restrictive. The longer we stray we stay restrictive it's like a slow poisoning to the economy.
It really does cripple business activity. It will crimp business activity in the quarters to come.
>> Some parts in the market wagering about the Fed even though more than likely, those are the odds this week, maybe one more. Then they will be cutting.
As early as December.
To me that seems like quite quick change of pace. Dare I say even a "pivot".
>> I think that's were some confusion comes in the market.
The Fed has not done any favours by saying this is where things are in the market. Way too aggressive.
I think what the market is telling you is that this is really a collection of probabilities.
So the past doesn't make any sense on its own.
what it is is a combination of nothing.
Or we go into a recession and the cut 300. Which is historically what they would do.
So that small, you see a hike and then 150 basis points or 100 basis points. It cuts than here. Highly unlikely I think when you see 100 basis points.
The two I would be looking for is nothing or three or 400 in a situation where we have a hard landing, if you will.
I think that's what you should draw out of that.
The probability of really a binary outcome of the world. And I've talked about that last month about the chance of a real goal contraction this year. Again, to say what's going to happen is kind of a game. That's one probability and the investors need to be very aware of into the end of the year.
>> With all these major forces at play, the thick of earnings season, now we've had some pretty heavy weight reports out of the states. What are we seeing that those earnings?
>> I think generally speaking better-than-expected.
Some weakness in the economy sectors.
Tech came in fairly good if you will, that is in expectations.
You see a pretty big rally this year.
I would not get too excited about it.
Amazon did more in their shares are up quite a bit.
We are seeing a slowing. I don't expect to see, you know, earnings and start to inflect anytime soon.
We will continue to see earnings struggle to beat last year into the remainder of the year.
>> From an asset allocation perspective, given the fact that this is what we are seeing from earnings, given the fact that the Fed is on deck this week and the stresses in the US regional banks, what should investors be thinking in terms of putting money to work on the markets and allocating cash?
>> For us right now the word do sure would be patients.
We are running a fairly defensive positioning.
We still hold equities. We have hydrated to kind of, larger higher quality parts of the market.
Survivors, if you will, companies with business models who tend to actually thrive through this as their weaker counterparts succumb to stress of the slowing economy. We do have, we have in the past and continue to favour fixed income. It's one of those where we can kind of have a defensive set up. Earning 5% of the income side.
Dividend yield, dividend yields, outside of the US are pretty attractive around the world.
And it's one of those periods where you just want to minimize mistakes right now. I think you know, the third mark of the year, we have had this pretty aggressive rally in tech which is a real weakness last year. Much I believe is been positioning a lot of investors getting caught shorter underway or whatever.
There is been a bit of a catch up.
That is always the analogy from bear markets.
You try to do something and be clever and you get hurt.
It's really about being patient and consistent right now waiting for things to start presenting opportunities again.
I don't think it's a great entry point right now for risk.
>> Any signposts to look for while we are patient?
Maybe our patients will start to pay off for us?
>> Two things I think that are still steady for us is one would be to see a value rather valuations come high in bond yields. I still think valuations in the US market are too high. The second is really starting to see inflation crack and that will require the housing aspect of inflation, rents etc., coming off as well as services.
So core services.
Core services, excluding housing in the US. You want to see those two sectors because until you see that, you're going to continue to have a strict policy. Like I said earlier, more things will break. Those are the two things I want to see improved material into the end of the year before we start getting a bit more excited about the backdrop.
>> Always great insights with Michael Craig.
We will get your questions about asset allocation for Michael in just a moment's time. A reminder of course that you can get in touch this by emailing moneytalklive@td.com or Philip that viewer response box under the video player on WebBroker.
Now let's get you updated and some of the top stories in the world of business and take a look at how the markets are trading.
Norwegian Cruise lines is raising its profit forecast after handing in stronger-than-expected first-quarter results.
Company is been raising ticket prices and is optimistic for travel and demand an onboard spending by wealthy crews and customers will continue to boost revenues.
Norwegian has said it expects fuel and food costs to ease later this year. You see right now the stock up 8 1/2%.
Enbridge, acquiring and natural gas storage facility in British Columbia for $400 million.
A deal with fortis BC holdings which has 77,000,000,000 ft.9 of capacity. Enbridge says the facility is with three natural gas potential lines.
Cargojet reporting lower profit for its most recent quarter.
Carbo said the company says volumes are spending toward services and away from goods. A trend they expect will sit will stabilize later this year.
They say it focuses on controlling costs while riding the current economic environment. Stock up about 5%. A quick check in on Bay Street and Wall Street.
Starting here and over the TSX Composite Index.
49 point game. Pretty modest, about 1/4%. South of the border, the S&P 500 right now up a very modest eight points. About 1/5 of a percent.
We are back now with Michael Craig taking your questions about asset allocations. Play coming and let's get to them.
(Greg reads the question) let's talk about Alice asset allocation.
>> You know, when you say long term, I'm assuming five years or more. You know, right now, outside of the US, Europe Canada, not too expensive.
Fixed income is offering highest income yields that you've seen in 15 years. So those will be places I be looking in. I think, again, if you're saying long term, it might be a little bit hairy to the next 6 to 9 months. But again, as long as you're in that quality side of the market you'll be fine.
Those would be the areas I be looking at right now.
Ultimately it's really key that you understand what you're trying to achieve with your long-term investments, depending on if you're trying to make a lot more returns.
Always a good place to have some advice for an advisor.
>> Talking about fixed income part of the portfolio.
Obviously last year was a very tough year for both fixed income and equity given how aggressive the central banks were.
Saying with yields have not been this attractive for this long time for fixed income.
I guess the possibility, when you do see the central banks firmly decide to get out of restrictive policy and do a bit of cutting, maybe even a little gaming on the headline of the number of the bond?
>> There are three things in fixed income right now in that are interesting. One is, if nothing happens, yields are at 5%. My senses as inflation starts to moderate that yield will actually be excessive in excessive inflation so that is very appealing to investors. Second, because last year was so tough much of the market trades well believe on par.
The bonds will, as they come to maturity, you get your $100. So from an after-tax perspective, fixed income is again trying to bring as much of that return over time will be capital not income. So better tax advantage.
The third, I mentioned earlier, there is a chance we go into a severe recession this year.
I wouldn't put it as a base case but it is one in six or one and seven. If that materializes, the complexity of fixed income will kick in and I would expect to see material capital gains from government bonds.
So, again, that's a very problem rather probable. It's not a forecast but it will be the third reason why fixed income is an asset class are now.
>> Let's get to another question from the audience.
This one about government bonds.
Are there differences to be considering here?
>> There are a few to be mindful of.
One is the currency of course. Depending on whether it's hedged or not. If it is not hedged, much of the return is going to be coming from the differential between the Canadian and US dollar. So you have to be thoughtful about whether it's, you know you have US dollars and you're looking to keep them in the US, that's fine.
But if you are impacted by the currency differential, that's quite important. In terms of outright yield, the US actually trades at a material discount to Canada right now.
I would say that discount is a higher end of its long-term, over time, US trades above and through Canada.
Right now, it's at the top decile in terms of being cheaper in Canada. So many across the curve, you were looking at anywhere from 60 to 80 basis points additional yield from US treasuries.
The last thing I think you need to be mindful of is that we do have this budget ceiling headache coming down the pipe and that could lead to some nuclear volatility in the US markets. So one thing to be mindful of.
>> Is that short-term volatility? When we think of the debt ceiling, there's a lot of political wrangling about it. The US government, I think, when people are trying to be optimistic or even realistic saying one of the chances they would actually default on that?
Although if you get into political games who knows who makes an error?
>> Yeah.
First of all the market is showing stress of this already. Treasury bills that are maturing before there date when you think they're going to run out of money, a huge premium to treasure bills that are maturing after. As well as fall swaps on the US government data are at an all-time high right now. So there is a lot of angst in the market.
You, in theory, could have a default through operational issues. Through the Constitution, they are actually not allowed to default but because there is so much operational risk in trying to say "okay, were not going to pay pensions and healthcare.
… The risk of an operational error should not be dismissed." The issue with this, eventually, they will likely come to some type of resolution. The question is what kind of damage do they do to confidence by the time you get there.
And neither party right now is incentivized to really make a deal because they are basically, if you're a Democrat, you get to a budget issue, you're going to blame Republicans. And in Republicans, they will blame Democrats.
So there is no incentive right now for either party to compromise.
I think, will this be a material source of heartburn over the next couple months.
>> Heartburn.
I like how you put that. I suffer from that sometimes.
Next question: (Greg reads the question) >> That's an interesting question. In terms of again, it goes to the kind of scenario you're playing for.
But, just to be very simply, in terms of total return, the risk is, the risk is part of the curve which will be the biggest price impact if there is a rally, it will be the longer end.
So if you are bullish in fixed income, you can take that type of risk, you might want to look at the longer end of the curve as it will have the biggest the biggest price gain. But to be clear, the long and has actually suffered about a 50% decline since 2001.
So this is not for the faint of heart.
If you're looking for the biggest bang for your buck if you will, it will be the longer term governments.
>> Some people want to take a look at fixed income, perhaps they don't have the kind of money for the market to get in to government issues.
Obviously there's other alternatives.
What people need to think about ETF's are mutual funds?
Other instruments thought of as fixed income but not purely just buying a government bond.
>> If you buy the whole market you have other sources of bonds. Corporate if you will. Right now, trading ads, I would say fairly tight spreads.
Relative to the backdrop.
In a soft landing scenario, those would be faring very well. In a hard landing scenario, that will be a bit of a headwind to your tailwind.
Floating right now would be another part of… That will be a bit more challenge in an economic slowdown because they tend to be more leverage companies. So fixed income in itself is exercised asset allocation.
You can a fixed income that is very equity like all the way to pure government.
This is where you do your homework and understand what you're buying to make sure you are aligning what you're trying to achieve with the instrument you're using.
>> Is always at home make sure you do your own research before making any investment decisions. We will get back to your questions with Michael Craig on asset allocations in just a moment's time.
A reminder that you can get in touch with us any time by emailing moneytalklive@td.com.
Now let's get to our educational segment of the day we are in the thick of earnings season. If you like to see a company performed in the way this quarter, WebBroker has tools which can help.
Nugwa Haruna, Senior Client Education Instructor with TD Direct Investing as more.
>> By law companies are required to produce the financial statements. And they will produce the statements quarterly and at the end of their fiscal year. So there are three financial statements that investors can find in WebBroker.
That would be the balance sheet, the income statement as well as the cash flow statement. Let's show investors how they can find these financial statements within WebBroker.
Click on research, under "investments" they can click on "stocks". Any company they are interested and once here you can click on "fundamentals".
And on "financial statements". Now for investors looking to find the quarterly financial statements, they can do that by clicking on the tab that says interim. But if you're looking for annual financial eyes statements annualized financial statements you can click on "annualized" starting off of the income statement.
This is also known as the profit and loss statements.
It gives investors an idea what the financial performance of the company has been over a particular period.
Then there is the balance sheet statement. Essentially the net worth statement of the company. It gives investments an idea of the company's assets.
Which is what the company owns. The company's liabilities which is what the company owes as well as shareholder equities so essentially, how much investors have invested into the company. Finally, there is the cash flow statements. The cash flow statements gives investors an idea of just how well the company manages its cash position. Debt obligations as well as how well it's able to fund its debt operations. Investors might ask "how is this relevant to me as an investor and how can I utilize this information?" That is where the idea of ratio analysis comes in.
It takes information from these financial statements and compares that on an industry basis or company to company basis.
So investors looking to do a ratio analysis can do that by clicking on the industry comparison tab. We will focus on one ratio today. Just going to scroll down.
We will look at the current ratio.
The current ratio essentially is a liquidity measure.
It gives investors an idea of how well a company is able to meet its short-term liabilities which would be any debts due within a year.
Using it short-term assets so anything it owns that it could turn into cash within a year.
Now, an investor would compare what the current ratio of the company is compared to the industry.
If the current ratio is on par or slightly higher than the industry average, that may be a good thing because it shows the company may be able to meet its debt obligations. On the other hand, if an investor finds that the current ratio is much lower than the industry average, it could be an indicator that the company may be at a higher risk of defaulting or maybe experiencing financial distress. So essentially when an investor is looking at things like the financial statements are ratio analysis, they can do this in WebBroker and eventually look at how they can tie this information back to their investing strategy whatever that may be.
>> Our thanks to Nugwa Haruna, Senior Client Education Instructor TD Direct Investing.
Make sure to check out the learning centre on WebBroker for more educational videos, live interactive master classes and upcoming webinars.
Now before we get back to your questions about asset allocation to Michael Craig, a reminder of how you can get in touch with us.
Do you have a question about investing, or what is driving the markets? Our guests are eager to answer your questions so send them to us here at MoneyTalk Live. You can send your questions two ways: you can send us an email any time at moneytalklive@td.com or you can use the question box at the bottom screen right here on WebBroker just type your question and hit "send". We will see if one of our guests can get you the answer right here at MoneyTalk Live!
>> We are back with Michael Craig Head of Asset Allocation at TD Asset Management, taking your questions about asset allocations.
Let's get to this one.
(Greg reads the question).
>> I will answer them three ways. First, there are 6000 regional banks in the US. It's a very fragmented banking model. These are not the J.P. Morgan's or Bank of America's. These are small regional local banks.
Very simple business models. They take deposits, they lend to local businesses and that's it.
So very simple, rudimentary banking model. They, it's quite often, these disappear.
Bankruptcies all the time.
As a depositor in the US you are covered up to $250,000.
So for Canadians who may be snowbirds and have their money, from their perspective, just be mindful that you are insured up to that amount and there is always a risk dealing with very small regional banks.
As a Canadian investor, are far banks are very different.
They span multiple businesses wealth insurance, banking, etc.
Our overall funding risk is overpressure on our sector.
You can't compare the two. And our model has been much more conservative with far more balance sheet strength, if you will. So I don't really see, it's not a one-to-one stress happening. Regional Bank in the US does not necessarily lead to stress and the Canadian.
Obviously, we see globally, financial conditions tighten and it will put stress but I just don't, our banking sector is one which we have chosen and a handful of very strong institutions. Not a kind of massive, weaker ones.
Historically, that's proven to be the right model in terms of stress so it's not something I worry about it might to be honest. But it is important, you know, taking the question into context about how you're exposed to regionals and that would be something I would be mindful of.
>> One of the larger readthrough is, I've seen attributed to what's happening with US regional banks is that, I think the Fed even admitted themselves, when it comes to their rate policy, maybe as we are trying to let you know, tighten things up, cool the economy a little bit. This could actually do a bit of the work for them in terms of availability of credits of the border.
Maybe the Fed doesn't even need to be as aggressive as one it once was.
>> 100%.
It'll come out early this month.
The Fed's survey of lending officers, it has tighten materially. As credit growth slows, this will really put brakes on investment and, you know, resist the question of how much real economic damage has to occur to see inflation come off.
This is a race right now between inflation cooling and the hit to growth that you will see because of it. So.
That's the way I would think about it.
>> Okay. Here's what we've been skirting around.
Point blank: do you anticipate a hard or soft landing?
>> Yeah. I am… We are positioned for both.
Let's put it that way.
So there are certain aspects of the backdrop right now that are quite ominous.
Commercial real estate in the US has struggled. Credit conditions are tightening.
We do have this backdrop of a world that has a lot of debt.
So we are not talking about the 1980s when debt levels were very low.
So that, in the back of my mind, is one where it could be positive and like I said earlier, don't listen to me.
Global growth could drop to 1% and it would be a pretty severe recession.
So that would be… You know, on the flipside, there isn't an obvious… Massive balance right now. It's not like they can point to something and say "there has been tons of capital chasing this bad idea that is been blown up.
US residential real estate in the 2000. So it's not clear to me what part of the economy is really vulnerable in terms of multiple years of excessive investment.
So, our thought processes if we go into some type of recession this year, it's not going to be a deep and brutal credit crunch like we saw in 2008.
But I would not want to dismiss it as impossible.
Sorry to not give a precise answer but this is a business of probabilities and building portfolios that tend to do well in a handful of different circumstances and I would say, the way we are built right now is how either those circumstances happen today, I would look at portfolios and say I don't really need to change much. Because that's kind of how we are set up for that outcome.
>> The playbook for central-bank, obviously, if you had a recession or severe recession, slashing rates aggressively. That's the playbook. Can they do it again? After what they just did in 2020?
>> Again, if you have stagflation area environment, I don't think you can.
So that is the real risk.
It might… We have gotten so used to these kinds of V shaped markets. Easing and popping back up… I think many are not prepared for this kind of meandering market that just kind of goes nowhere for two years.
We are about 14 months into that market right now. But, for us, we are not really expecting this kind of V shaped more than anything, it's more of meandering. I would not be shocked if stock markets are giving or taking where we are today after 10 months time, maybe going through some volatility but not going anywhere.
As we start to ultimately, there's two types of corruptions, price one that we are all sensitive to but this idea of a time crunch and we kind of the knower for two years and you kind of rebound again.
So that's kind of how we are thinking about how the next 12 months plays out.
That more meandering estate of the world.
>> Another question now, this one in the headlines (Greg reads the question) so… I've seen arguments on both sides of this deed dollarization thing. How much attention should be paid to it?
>> I don't think a lot.
It's, you know, with the war in Ukraine, one of the steps the Americans took was to use the dollar as a weapon.
And to basically use the swift movement of payments and transactions to really lock out Russia. In other countries, obviously took notice and are realizing that, you know, they get on the wrong side of US policy, there's a risk that this happens to them. So there is an incentive to move away from it. It's a little bit, it's easier said than done.
Because if you and I want to trade, you have to sell me something I want and after provide you something that you need. And there are certain bilateral relationships are I think that makes a lot of sense.
If you take Saudi Arabian China, could you check use with oil in Chinese technology, that could actually facilitate trade outside of the dollar system.
I don't think I mean I think this is probably a likely trend. What it means no, well, in certain places, right now, most places of the world will take US dollars right?
It might be at some point in our lives where the dollar isn't as fundable as it has been in certain countries because they don't use that currency. Does that of a huge implication for finances? I don't really know.
It's not something where "oh my gosh I have to sell my assets because the dollar is going to zero" I don't think that's a Takeaway.
The takeaways that we are moving away from a sole US dollar.
Replacing pound sterling and we are probably going into a world we don't really have the sole economic superpower that is driving. Where trade is still the currency. But it will take this is a theme that will probably take longer than my career in your career. It will take many years for this to play out.
>> Let's get to another question now. Sector specifics.
When you think of REITs is their office real estate danger?
… Tuesday and Wednesday and Thursday a little challenge.
>> A few things. Not all REITs are office-based.
There's a difference between a diversified REIT and one it's focused in office. Our approach is been to spread it around.
Multiresidential is still very tight. Industrial is still very tight.
An office is quite soft right now. Vacancy rates in Toronto for example are 17 to 18%.
Calgary even higher.
That's can lead to some stress in that part of the market. In the US, it's been quite mercenary, if you will.
You saw a couple of major layers just walk away from buildings and say "here the keys".
I don't think you get, things after really materially deteriorate here. It's not the way commerce in Canada and that trade.
But I would say that scenario it will probably be soft for a while and I don't think we have, kind of, settled. I don't think companies necessarily settled on in person versus virtually. I think it's very much still in flux deepening of the business you're in.
So your empty seats on the go train, they might be there in a year, they might not.
That's something else you probably want to consider. Or we can go to more higher rate or less?
My sense is probably less. But in the near term, it's going to be a bit of a struggle in the office market.
> I got longlegs to so I need some room on the train.
Very selfish of me! We will get back to your questions with Michael Craig on asset allocation in just a moment's time.
Always do your own research before making any investment decisions and a reminder that you can get in touch with us.
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> Speaking about commercial real estate, of course concerns and they are escalating, a multitude of headwinds including high vacancy rates, tighter credit conditions. Anthony Okolie joins us now with the new report from TD Economics.
>> Thank you very much Greg.
TD Economics says commercial office rate fundamentals remain sluggish. It's highlighted by the fact that the vacancy rates are past the global financial crisis peak.
Actually rising to a new all-time high of nearly 13% last quarter.
TD Economics notes that office usage across 10 large US metro areas is still less than half its pre-pandemic levels.
Now, the impact is not felt evenly across markets. They note in the report that markets like Miami and Tampa Bay have been helped by the inflow of both people and businesses during the pandemic in the office vacancy is not much higher today versus the end of 2019.
However, the pandemic Simpact has been felt much worse in other areas like San Francisco and Seattle.
Where vacancies around triple and double the precoded levels respectively in those cities. Now, this is having a big impact on office rents.
Which of barely grown since the start of the pandemic.
Rising only about 1% year over the past year.
Also, type lending environment is also hurting new deal activity.
With the fourth quarter of 2022, new transaction volumes for offices at the weakest levels since the fourth quarter of 2009. TD Economics does not see a turnaround in sight for the office real estate commercial space. One of the reasons they point you, and we have been talking about this today, is remote work still persists. About 30% of the five-day workweek is still spent away from the traditional office, work office environment.
Also, there is some 60,000,000 ft.8 of new office space in the US to come online by the end of the year. Adding to an already saturated market. And with an estimated $150 billion in non-bank office debt expected to mature over the next two years, the bulk of that, actually coming to this year due, couple that with tighter lending conditions, plus the fact that many of these loans will reset much higher rates.
Boost the odds of commercial real estate, mortgage defaults will be on the rise over the coming year and TBD TD Economics does not expect to see a meaningful turnaround very soon.
Greg?
>> When it comes to some of that banking sector stress in the regionals in the states of course, there's been a commercial property angled to that.
What does the latest data tell us, the Fed about how that's transpiring?
>> The Fed has this banking funding program for some of these banks to get into trouble. They said the weekly data showing that banks use of emergency low programs remains elevated and has been trending moderately higher in recent weeks. Now, good news is the uses below the peak recorded back in March. But TD Economics points to this evidence as signs that the recent banking stress continues to linger as it has yet to meaningfully subside.
Greg?
>> Interesting stuff. Thanks Anthony.
>> My pleasure.
>> MoneyTalk Live Anthony Okolie.
A quick look at the markets. Let's check with the TSX Composite Index.
About 1/3 of a percent, fairly modest.
Noticing some of the miners getting a bit today. Let's check on IAMGOLD right now.
Did notice some weakness in the lumber including Interfor.
2118 a share, only down to 30%.
South of the border, the S&P 500, let's take a look at that broader read of the US market, 14 points, 1/3 of a percent.
You do have the Fed on deck this week on Wednesday, as Michael was telling us earlier, May day holiday in Europe.
Let's take a look at the tech heavy NASDAQ. Negative the beginning of the show pretty not much is flat now.
Uptick.
J.P. Morgan, of course in the headline today.
Right now it 142.90 a share a little bit more than 3% of a big Wall Street name.
Back now with Michael Craig had a vast I look with TD Asset Management. Take your questions about asset allocation. Lots coming in.
This one right now, do you expect companies to raise dividends?
>> So a broad question.
Some will raise of course.
They some raise every year. But I would expect the dividend growth slow in line with earnings growth being you know, negative.
We expected to be negative.
We see negative dividend earnings raise from that.
The other side would be that you now, excess cash flow, they might start thinking about debt payment as well.
Because the cost of financing is much higher than it was. So, there is more incentive now to deliver, if you will, versus because of the cost of money. So I would not be too bullish on the prospects of broad-based dividend raises over the next four months.
>> In an environment like this, it's understandable.
Before let you go, I want to talk with the broader team at the top of the show. So much in play right now.
We are in the thick of earnings season.
The first Republican Fed on deck, what should investors be thinking in the near term? Even in long-term?
>> In the near term I have one eye on what's going on with the US government.
I think that matters a lot.
… Going into, kind of Q2, H2 of the year, be mindful of looking for and continuing to slow down, imagining kind of coming off of manufacturing contraction services positive. Watch that data.
The sensitivity to economic data is incredibly high right now because people are confused. Rightly so. So have an eye on economic data to see where it continues to go lower. If it does, you can kind of get a sense that a recession is more likely than not. So that would be where our focus would be in the next 3 to 12 months.
>> If you take understandable confusion, some drama in the short term, the US government and other areas, what does that say about a discipline for an investor? It seems like a time where you really need a strategy that you believe in. And you stand by and you don't panic in the middle of everything.
>> Let's talk about ways you can use a lot of money.
You lose a lot of money when investments go bankrupt.
You're investing for a longer period of time, these absent flows, some years are better than others.
But as long as you don't have that permanent loss of capital, everything tends to do okay.
So I would be very focused on quality. Companies that will likely actually, consolidate and get stronger.
You. Like this.
Tend to see them actually build their businesses because they take out we competitors.
You want to make sure you have high quality to your portfolio. Companies that continually grow the dividend is a great metric of long-term health would be one thing I look for.
That's where I would be placing my investments right now. Versus the more kind of, fringe year stuff that will probably disappear in the next couple years because the conditions we are operating in.
>> Always great to have you here. Always insightful and looking forward to the next time.
>> My pleasure.
>> Our thanks to Michael Craig Head of Asset Allocation at TD Asset Management. As always make sure you do your own research before making investment decisions.
Tomorrow, we will welcome Cathie Wood about technology stocks.
Email your questions at moneytalklive@td.com.
That's all the time we have the show today. Thanks for watching and we will see you tomorrow!
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